Product recalls are a crisis exposing the firm to potential legal liability and reputational damage.
Such a crisis makes it crucial to quickly and directly reach a wide network of stakeholders with its intended messages.
Using a sample of 405 consumer product recalls between 2000 and 2012, researchers examined whether corporate social media affects the market reaction to product recall announcements.
Evidence demonstrated that recalling firms with any of the four social media platforms (corporate blogs, RSS, Facebook and Twitter) experience a less pronounced negative price reaction to their recall announcements than firms with no social media accounts.
Compared to traditional disclosure channels, social media allows a firm to directly and quickly reach a large network of stakeholders with its intended message, said the researchers.
Social media: benefits
Timely disclosure of the recall to a large network of users is an effective way to contain the damage.
It gets more consumers to stop using the potentially hazardous product sooner, reducing incidents, which minimizes negative publicity surrounding the recall as well as the associated legal liability.
Social media use enables the firm to quickly fill the information vacuum with its own message, before misinformation, rumors and speculation intensify the crisis.
Through consistent and continual communication, the firm can demonstrate its competence in handling the crisis and show concern and empathy for those affected by the product hazard, lessening stakeholders‟ negative perceptions in the wake of the recall.
With interactive social media the firm is able to observe and directly respond to customers‟ inquiries with accurate information, empathy and even regret.
This ultimately helps the firm regain credibility and repair its reputation.
Social media: pitfalls
The downside is that bad news is spread to a wider audience and the firm does not have full control as social media involves multi-directional dialogue.
This can be detrimental to a firm’s reputation and its future sales as more consumers learn about the problems with the firm’s product.
Other users can broadcast their messages on the firm’s social media channel, potentially diluting or even distorting the intended message, interjecting rumors and speculation or voicing negative sentiment.
Corporate social media, in general, reduces the negative price reaction to product recalls.
For Twitter, researchers identify all activity that involves a recalling firm’s handle.
They examined how the price reaction to product recalls varies with the abnormal levels of firm and user tweets around the recall.
In the early part of the sample, pre 2007, about a third of the recalls had social media.
Post 2008, over 50% of the recalls used social media and over 80% of the social media firms used Facebook or Twitter.
By 2012, the last year in our sample, 97% of the recalls use social media and all of them used Facebook or Twitter.
Increased frequency of tweets by other users exacerbates negative market reaction but more tweets by the firm reduces negative market reaction.
Source: Journal of Accounting Research
Online ahead of print, DOI: 10.1111/1475-679X.12074
“The Role of Social Media in the Capital Market: Evidence from Consumer Product Recalls”
Authors: Lian Fen Lee, Amy Hutton, Susan Shu